Today we will focus on the tools a VITE uses in the journey to help manage IT costs.
All journey’s start with knowing where you are starting from. This journey starts out with the free assessment gig. Two of the dimensions in that deliverable are related to finances or costs. Maturity in these measures relate to, are you capturing all costs, is there a process in place to plan for costs, is there defined governance around how much is spent, do we measure how well we are following that governance and are we constantly improving those processes. Doing that assessment will give us a starting point. However how do we progress along the journey?
There is no journey unless we know where we want to go. We need to have a measure of how much an organization should be spending. According to TechVara:
- The average small company (less than $50 million in revenue) spends 6.9% of their revenue on IT
- Mid-sized (between $50 million – $2 billion) spend 4.1%
- Larger companies (over $2 billion) spend a relatively tiny 3.2%
These are great goals to use for building out the road map of where we should go in terms of IT spend. Now that we know the starting point and the ending point it is easy for the VITE to put a plan in place for those financial dimensions we referred to earlier.
Let’s take TrimmBo, our company that makes tree and brush trimmers that work like a RoomBa, as an example. After meeting with Maddie the CFO, Hannah (our VITE) could asses that in terms of applications the financial measure was a 1 and in terms of infrastructure the finance measure was a 4. What does this mean, it means that while Maddie had a very firm grasp and control on IT spend for infrastructure in the organization, that same level of discipline was not there for applications. Hannah found that lots of costs in terms of applications were leaking out to operations costs because the application owners were doing a lot of IT work in the shadows.
In her first 60-day road-map, Hannah made it a priority to get those costs captured correctly. In doing so she could determine that the true IT costs were 4.9% for applications and 3% for infrastructure. Hannah and Maddie decided that whey would target a 6.9% spend on IT to get them in line with industry norms. Since TrimmBo has 25M in revenue the target was to reduce IT spend by 250K. They first identified 50K in spend that could be reduced by starting a lease program for the company’s computers. However, they also decided that since the 3% spend in infrastructure was already nearly at an industry standard that whey would look for the rest of the 250K in application spend. So, the remaining 200K had to come from a reduction in spend on applications.
Now came the hard part. How could Hannah and Maddie reduce 200K of spend in a 1.2M budget that the team already thought was not enough. That is a 16% reduction in IT spend that the application owners just could not envision. Looking at the shadow IT spend that Hannah had found in her first 60 days she was able to determine that by better utilizing less expensive application support team members she was able to reduce the amount of time application owners were spending maintaining their systems by 50%. This saved the business 50K. Next by looking at the servers being used by the HR systems and the ERP systems she came up with a virtualization strategy that reduced the number of servers needed by 25%. This saved the company 100k. Finally, by doing license cleanup she found 15 unused ERP licenses and 3 unused HR licenses. Working with the application vendors, those 18 licenses were returned and saved the company the final 50K.
With the annual plan being such a success Hannah and Maddie decided to tackle a 5-year plan for IT spend. In that plan, they worked with the CEO to discuss what the right mix between spending on infrastructure and spending on applications should be. Hannah and Maddie showed the CEO that growth was being driven from the application spend and that it made sense to set a goal to spend 1% more on applications than infrastructure. They also suggested that overall spend at the end of the 5 years should move to 4.5%. Putting it all together with the 5-year growth plan of becoming a 50M company, that would mean that TrimmBo would target to spend 875K on infrastructure and 1.4M on applications. Compared with the 7.9% that TrimmBo was spending when Hannah started this would be an annual savings at the end of the 5-year plan of 1.7M.
Driving savings in an IT organization is not always easy, however Fortune 500 companies are very skilled at doing just that. It is possible to take those practices learned from Fortune 500 companies and drive them into smaller organizations. Level 5ive Consulting does just that. Fill out the form below to request a free assessment and start your journey to Fortune 500 IT experience at an affordable price.
About the author:
Greg Stellflue has 25 years of experience in project management, application ownership and software development. With over 30 years of industry experience he has focused on advancing information technology capabilities in many different organizations.
Email: [email protected]
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